The true cost of our pay check to pay check culture

A few weeks ago I read a scary statistic.

According to a LendingClub report, over 60% of Americans live pay check to pay check.

And what is worse, this is not a reality for only low income families. More than half of Americans earning over $100,000 a year are also living pay check to pay check.

This reality reflects not just a lack of financial means but also a broader cultural trend that prioritizes immediate spending over long-term wealth building.

While some may argue that they have no desire to be rich and enjoy living for the moment, it’s essential to consider the potential health and cognitive implications of constant financial stress.

This newsletter is going to share the results of an important study on the cognitive effects of financial stress, and the tools Islam has given us to protect ourselves against it.

I started my career at the bank in the fraud department. And although the salary wasn’t great – what I learned in that job was more valuable than my entire university degree.

I watched as people with absolutely no money in their account would rack up credit card debt on gambling sites. People who constantly had fees for missed payments were spending hundreds of dollars on Farmville and Candy Crush.

They would take out exorbitant high interest loans to fuel their irresponsible spending even further.

As someone studying finance, it made no sense to me.

I recently found an interesting study that has some possible answers.

It examined the cognitive function of farmers over the planting cycle and found that the same farmer showed lower cognitive performance before harvest (during financial scarcity), as compared to after harvest when richer.
This could not be explained by differences in time available, nutrition, or work effort.

The authors suggest that money-related concerns consume mental resources, leaving less for other tasks.

This suggests that financial stress means coping not just with a shortfall of money, but also with a shortfall of cognitive resources.

The study found that financial concerns have a cognitive impact comparable with losing a full night of sleep.

We have all had the experience of trying to make an important decision after a bad night of sleep, or making impulsive purchases in the middle of the night.

When we allow ourselves to be in a constant state of financial stress, we are actually impeding our own ability to get out of our financial situation.

The results were also comparable to the cognitive abilities of chronic alcoholics versus normal adults.

How do we get out of the cycle?

We are living in a culture that pushes us to stretch our finances as thin as possible.

We are encouraged to take on interest-free, pay later options.

We are bombarded by images and pressure to constantly upgrade our standard of living.

The reality we are facing today is that 50% of Americans can’t afford a 1000$ emergency. This aspect of our culture is affecting our health as a society.

Living outside of our financial means has serious health consequences.

This is a message that resonates deeply with the teachings of Islam, which has many practical tools to protect us against the effects of financial stress.

1 – Consider that all Muslims are required to calculate their net worth every single year in order to pay their obligatory zakaat.

As a Muslim you should aim to have a net worth that is increasing over time. Part of your income should be designated to wealth building (saving + investing)

2 – All Muslims are permitted to own the basic amount (Nisab) without having to pay zakaat.

We should all prioritize having an emergency fund that is realistic relative to our expenses (enough to cover three months of our living expenses).

3 – All Muslim women are entitled to a financial gift upon marriage in order to provide her with financial security as she starts a new phase of her life.

This should be invested in order to outpace inflation and ensure we are maintaining a position of financial security.


Islam prioritizes financial security.

We should strive to avoid the trap of overconsumption – not just for financial reasons but also to safeguard our health and well-being.

If you have no savings at all, I want you to set a goal of saving just 1000$. Prioritize this, and know that every step you take out of financial stress makes the next step that much easier.

If you are struggling to get on top of your finances, I want to invite you to join the membership, which can be cancelled anytime. You can access the resources for less than 20$ for your first month.

May Allah put barakah in your finances, and allow all of us to live within our means.

I would love to hear your thoughts on this!

Yasmeen

Sources:

Poverty Impedes Cognitive Function
https://scholar.harvard.edu/files/sendhil/files/976.full_.pdf

The Poor’s Poor Mental Power
https://carlsonschool.umn.edu/sites/carlsonschool.umn.edu/files/2019-04/vohs_2013_science_the_poors_poor_mental_power_0.pdf

Why even American’s making more than 100,000$ live paycheck to paycheck
https://www.cnbc.com/2023/12/11/why-even-americans-making-more-than-100000-live-paycheck-to-paycheck